Can Spain’s Tourism Industry Survive a Tax Rise?

Reporting by Julia Chatterley, Writing by Holly Ellyatt

Wednesday, 8 Aug 2012 | 4:49 AM ETCNBC.com

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With “low-cost” flights to Spain more expensive than ever, a general and tourism industry VAT (sales tax) rise and a sharp fall in bookings, there are fears that tourism — the jewel in Spain’s economic crown — will not be able to retain its luster as the economy falters there, and beyond.

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Costa del Sol region in Spain.

As Europeans continue to strugglewith austerity measures leading to job losses and tax rises across the continent, holidays in the Spanish sun are perhaps high on wish lists but low on the priority agenda for many families. However, the tourism industry is one of the main lifelines for the Spanish economy, with the industry generating almost 16 percent of the country’s GDP in 2011.

Yoland Pickett, from the Benidorm tourism board, told CNBC that tourism was still viewed as a growth industry and that demand could match the previous year — especially in Benidorm, a town on the Costa Blanca that is popular with Brits (accounting for 40 percent of the visitors), Belgians, Dutch and Portuguese, as well as Spanish holiday makers.

“Overall, we’re quite positive,” she said. “We think we’re going to end up with figures close to 2011.”

Pickett said that the split between foreign and domestic demand in Benidorm was “50-50”, however, the Spanish Hotel Association has reported a drop in domestic hotel bookings of 30 percent in July as Spaniards already rein in their spending.

With the government attempting to raise an extra 22.1 billion dollars by 2014, it is introducing a 3 percentage pointrise in the national sales tax (VAT), from 18 to 21 percent. The tourism industry has not escaped unscathed either, however, as a rise from 8 to 10 percent will be levied on it from September.

Pickett was confident that the industry would not pass these extra costs on to consumers yet, however, despite estimates that the rise could deprive tourism businesses of 2 billion euros.

“It could’ve been worse. There were discussions initially of it [the tax] going up to 13 percent, as well as the general 21 percent planned for other sectors. But the two percent, for this year at least, will be absorbed by the industry and won’t be such a major impact- though it will on the profitability of the business.”

Pickett told CNBC that many of the hotels in Benidorm are still pushing through with refurbishment programs and can access liquidity from the banks, a sign that lenders still see life in the Spanish tourism industry.

Some businesses such as nightclubs, hairdressers, theaters and cinemas might not be able to survive without loans however, as the government reclassifies them from the 8 to 21 percent tax bracket overnight on September 1, when the sales tax rises are introduced. Pickett was a little less confident that these businesses would not suffer as a result.

“This is where [the rate rise] will be a little more problematic…it might affect the complimentary services [currently included in bookings] such as golf courses, nightclubs and other businesses that will see a rise of 13 percent in September.”

“That is quite worrying because it could reduce the spending power of the clients that come here on holiday.”